Small Businesses: Tax Reporting

Chris Leslie Excerpts

Monday 25th January 2016 Westminster Hall

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I commend all the speeches that we have heard so far, from across the party political divide, but particularly that from my hon. Friend the Member for Hove (Peter Kyle), who touched on the spirit of entrepreneurialism that many hon. Members speaking in the debate care about and has motivated them to take part. I think that it was the hon. Member for East Lothian (George Kerevan) who correctly said or implied that no one should turn their face against employing new technology to simplify or streamline what might otherwise be bureaucratic, wasteful paper-based systems. I do not think that that is really at the heart of the debate. I am less concerned about the shift from paper to digital than I am about the potentially even more seismic change from annual to quarterly reporting, updates, summaries, returns—call them what you will, there is definitely something that a small business will have to produce. In fact, I was wondering what the difference is between a return, a summary and an update. Perhaps the Minister was updated at the last general election rather than returned. I do not know, but it is on that specific point that we will want some answers.

My apologies, by the way, Mr Davies, if I am not able to remain in the Chamber until the end of the debate. I should also say that possibly we should all declare an interest—I point to my entry in the Register of Members’ Financial Interests—as individuals, because this proposal will not just affect businesses. In the Treasury’s update in the autumn statement and spending review, it was clear that the proposal will take in very many businesses and self-employed people, down to levels well below the VAT thresholds and others. I do not think, even though there are 110,000 signatures on this e-petition, that most people have quite realised the ramifications that the proposal could have for them as individuals submitting an individual tax return, as well as for those businesses that are affected.

This is not just about the move to doing things online; it is very much about the process of lodging the tax return or even update, because that is the thing that many people find particularly laborious. This is not about how things are written down; the issue is the process that takes up so much time and soaks up so much effort when a company is taking stock of the income that has been generated gross, of the expenditure that has gone out and of any gains or losses that have been incurred. When the Government say that in four years’ time there will be “at least quarterly” requirements to file “summaries” with HMRC, the Minister should not be too surprised if people hear that and feel that there will be at least a quadrupling of the administrative effort and exertions and the sweat and tears that sometimes go into that process.

My hon. Friend the Member for Hove has articulated sufficiently the broad points about why we should support SMEs; I have just a few specific questions about the Government’s proposals so far. Will the option of an annual tax return be abolished? Will companies still be able to make the return annually? Will this quarterly—or perhaps more frequently—arrangement be supplementing that? What exactly is proposed? The Minister says “at least quarterly”. Will he elaborate on how often he means by that?

Many small businesses and individuals will liaise with their accountants annually. They will collect together all the receipts or invoices and hand them over en bloc to their accountant, who will of course help with the recording of income, business expenses and so on. The accountant will examine those, perhaps audit them and agree a verified and checked final figure; and that is the point at which information is dispatched to HMRC. I want to drill down into whether the Minister is now saying that businesses and individuals will in effect be asked to submit raw, unaudited, almost “real-time” income and expenditure data directly to HMRC—disintermediated, if I can use that term, by taking the accountant out of the picture?

Will the Minister say a little more about where the accountancy and audit stage will fit into this process? That is a crucial thing for many businesses. They want to ensure that they are submitting information about their business activities in full, so that it is accurate. They will be anxious about what will happen if they make mistakes in those data, because they are going in on a real-time or near-real-time basis. They will be anxious about how that could ever be disentangled should administrative mistakes be made. Will not businesses now feel that they ought to incur even more accountancy costs, perhaps four times a year instead of annually, just to be on the safe side? The Minister can say, “There’s no need to do this. Just let us have access to your books and we’ll press send on Sage,” or whatever software the Minister envisages. However, I think that many businesses will want to take a precautionary approach. I can understand why they would do that, so will the Minister elaborate on that point?

What happens to the actual payment of tax owed? When will that be forthcoming? I think that the hon. Member for South Ribble (Seema Kennedy) touched on this point. Will an annual sum still be required, or are we in effect moving to some sort of pay-as-you-earn for small businesses? I have often found it a bit of an anomaly that many people who are employed have the tax deducted—dripping out as monthly payments—at source, but others have the option of making their tax payment sometimes 18 months further down the line. There is no particular incentive in that respect. There was, when interest rates were higher, the opportunity for people to forestall the payment of their tax and perhaps gain the benefit of holding on to that cash before parting with it and giving it to the Treasury. In this case, if we are moving to a sort of PAYE for small firms, it would be better if the Minister was honest and straightforward about it, because that would be a big change in the way business accounting works.

The hon. Member for Morecambe and Lunesdale (David Morris) made the point about seasonal businesses. He mentioned Christmas tree growers. There are many seasonal companies, which will do well in the summer months and perhaps less well in the winter or vice versa. Examples include window cleaners, sports coaches and people involved in holiday lettings. Of course, quarterly reporting arrangements will therefore be quite volatile over an annual period. Taking snapshots at a particular point in time will not necessarily give the final, smoothed, annual, true report of what the business may or may not owe in tax terms. There is a real question about peaks and troughs across the year and how that can be taken into account in a quarterly reporting arrangement.

[David Morris]

One thing that concerns me from what the hon. Gentleman is saying is that, if quarters are compared to relative years and HMRC thinks that something is amiss, it could enforce an investigation. Would the powers of investigation for HMRC be doubled overnight because it would have more of a dashboard—for want of a better word—on the computer to look between years and sectors and also types of businesses?

[Chris Leslie]

Many hon. Members will have filled in all sorts of electronic forms when purchasing goods and services. I can envisage an HMRC drop-down menu saying, “Pick the type of business that you are.” My concern is that not all businesses fit neatly into the categorisations provided by the computer. Whether the computer says yes or the computer says no, that does not always tally with the realities of those businesses’ needs. There is some virtue in the annual tax return arrangement, because it provides a smoother, more strategic overview of the tax liabilities of a business that is complex, even if it is small or micro.

There are bigger concerns about the design of the Minister’s proposal. For me, it is a bit of a distraction to get bogged down in the question of online versus paper. The core question is what is involved in moving to the quarterly summary and update arrangement. There are administrative issues, too, which people will worry about. HMRC has not exactly covered itself in glory in recent years in terms of customer responsiveness. I think 18 million phone calls went unanswered last year, and only 50% were picked up in the first half of 2015. Given that track record, I do not think the Minister should be surprised if people are a little bit wary about another big transformation coming, when they may want some help and support.

The Public Accounts Committee looked into HMRC customer responsiveness, and it was not exactly satisfied with some of the answers that it got. We need full assurance about HMRC’s competence on that matter. Principally, we need assurance about whether the Government are carefully thinking through this significant change, which could affect not only businesses and the self-employed, but many other individuals—perhaps tens of millions. The debate has been a worthwhile opportunity to pause and urge the Minister to think more carefully about the proposal.

--- Later in debate ---

[Rob Marris (Wolverhampton South West) (Lab)]

It is a pleasure to appear before you again, Mr Hanson. I give my thanks to the Chartered Institute of Taxation and the Federation of Small Businesses in particular. I also thank the petitioners and those who tweeted in response to the petition.

Broadly, Labour welcomes greater digitalisation, but I think that the Minister—he is an honourable and painstaking Minister—has been a victim of some wooliness in this whole saga. Fears have been expressed that the Government are about to do things that the Government say that they are not in fact about to do. That is always a difficult thing for politicians, and we face that whatever our political party. We are well able to defend our views and those of our party, but it is more difficult to deal with people misunderstanding our views and then attacking those misunderstood positions. We have to go through a double process with them: first, we have to sort out what our position is and then we have to justify it.

The change is a question of timing, software and the assistance that will or will not be available. As I understand it—the Minister will be able to confirm this or say I have got it wrong—a lot of HMRC stuff is already done online: VAT is online; there is real-time information for PAYE returns; and company accounts are being submitted in what is called iXBRL. No doubt, the Minister will know what that stands for; I do not. There is also the digital tax account and the agent online self-service, which is not to be confused with the agent secret service and which is for such people as accountants to deal with HMRC regarding the tax affairs of their clients.

What the Government are doing—it is very understandable; it is happening all over society—is an attempt to externalise costs. That is what it is in economic terms. We see it all over the internet with the use of online services. Many Members will be familiar with this, but years ago people would go to a travel agent, and the travel agent bore the overheads. Now, people go online and book with an airline or a travel company, and they are bearing the overheads, because they are paying for their computer, the heating and lighting in their home and so on.

HMRC is externalising its own costs, which is understandable because HMRC is not a profit-making centre. If its costs of operation are lower, taxpayers benefit. However, we know from other examples that externalising costs does not always go smoothly. I will quote from paragraph 1.5 of the Chartered Institute of Taxation’s very helpful briefing:

“Making Tax Digital is a huge project that is going to bring in fundamental changes to the tax system and how both taxpayers and their agents interact with it. It has the potential to create a simpler, more workable tax system if it is developed and implemented in the right way but it must be managed carefully and in consultation with taxpayers, tax professionals and software developers alike.”

That sets the scene quite well in terms of what one ought to aim for in government, whatever one’s party: to have an inclusive process that runs smoothly and not too quickly. It is not clear that the other online initiatives in HMRC have gone so well. The CIOT states:

“There is evidence that past changes in reporting obligations have led to an increase in compliance costs for businesses, and that HMRC tend to under-estimate these costs.”

In the spending review, HMRC tells us that the measure will save businesses £400 million a year, which would be very welcome, particularly for small businesses. I hope the Minister will clarify that, because I keep hearing about the effects on small businesses. We absolutely focus on that, about which more later, but I am not sure whether there is a de minimis or upper threshold. Perhaps the Minister will elucidate, because I keep reading, “This is an attack on small business; big business does not have to do this, and therefore it is unfair.” That might be the case, but at the moment it is not clear to me that, if the measure were brought in, it would not apply to big businesses; or, to get rid of the double negative, when this comes in, it will apply to big businesses. So we need to know who the policy will apply to.

We all know from the debate today that there is a big risk of increased costs for businesses, and that those increased costs are likely to fall to a greater extent on small and medium-sized enterprises, which do not have accounts departments. So, proportionately, the hit taken by smaller businesses, if this were to go wrong, would be much bigger because of the initial set-up costs. Even if there is free software from HMRC, it has to be installed on a computer, if the small business has one. There is increased staff time in preparing and checking all the records four times a year and a potential increase in the fees of agents, particularly accountants. Some small businesses might need to engage an accountant, whereas previously they might not have done so.

All that costs money, and if HMRC were to raise queries four times a year, in contradistinction to once a year, the likelihood is that those queries would not be a quarter as many or a quarter as complex and that, when a whole year’s worth of quarterly queries is added up, it would take more staff time and cost more for businesses, particularly, but not exclusively, for small businesses.

There is a question of timing. I understand there will be consultation this spring, so the hares are now running. We have a petition of 110,000 signatures. Organisations have considerable concerns, many of them expressed today, particularly on two aspects that are linked. There is the sanctions aspect and whether sanctions would be applied for failing to do a quarterly update. My hon. Friend the Member for Nottingham East (Chris Leslie) was right: we could use a multitude of words for this measure, but we must not use the word “return”. Returns are for taxing, winning elections and birthdays when we get happy ones. Generally, we do not say, “Happy tax returns.”

[Chris Leslie]

Many happy updates.

[Rob Marris]

Indeed.

I hope the Minister can elucidate whether the software will be free, as has been indicated in some of the material I have read. If it is to be free, or paid for by the individual, when will it be available? Perhaps it is available now; there is no sense in having the system and no software to deal with it.

Perhaps the Minister will correct me if I am wrong, but I understand there has as yet been no impact assessment, which seems to be a rather large lacuna in what hon. Members and outside organisations engaged in this matter agree—it does not mean it is right if we all agree, but the tendency increases—is a pretty big change and may presage bigger changes on a more widespread basis.

It would be helpful for business if HMRC went about saving money—externalising costs, being more efficient, whatever we want to call it—before cutting staff so much. To cut staff and introduce this new measure is a triumph of hope over experience when it comes to computerisation programmes, whether in government or in the private sector.

I have another question for the Minister on the vexed question—in spite of the agent online self-serve system—whether there will be synchronicity by April 2017. At that point, quarterly updates will have to be filed by businesses and agents will have access to all the information online—not just the information of their clients, but HMRC’s—and will interact with HMRC digitally, because otherwise there is a risk that businesses will file updates four times a year, but their agents will not be fully engaged in that process that has happened before, and that is a concern.

As for staffing, there are lots of different ways to count staff. When I have probed this, there has been a difference of opinion between HMRC and the Office for National Statistics. However, if we look at the broad trend, the ONS and HMRC agree that since April 2010, when the Conservative-led Government started, there was a cut of almost 20% in HMRC’s staff by April 2015, and there are more cuts in staff to come. On the centralisation of offices, for example, which has been adverted to, only 90% of staff will transfer to the centralised regional offices, according to HMRC’s own figures. So a greater loss of staff is likely. Loss of staff per se is not a bad thing if an organisation is running more efficiently, but it seems to me to put the cart before the horse to say we will lose staff at the same time or even before we bring in this online stuff. Again, it is a triumph of hope over experience.

Will the Minister tell us about the practicalities and exactly what data will be submitted? My hon. Friend the Member for Nottingham East referred to this key question. The Government are saying to businesses, “We want you to provide some information four times a year,” to put it at its most neutral. What information will be required four times a year? The likelihood is that businesses will no longer have a choice about how to keep their records, because, although they may retain that choice in theory, for practical purposes, they will have to keep that information in a way that is compatible with the HMRC model. That may be a good thing, but uniform models in business are always a little suspect, because they can crowd out innovation. So there is a question mark there in terms of that forced uniformity, unless HMRC, for example, comes out with two or three different sets of free software, which I doubt, but perhaps the Minister can tell us more about that.

If, as has been suggested in some of the material—again, perhaps the Minister will clarify—this is a system whereby we press a send button and all the information squirts out the computer, down the broadband, if we have broadband, to the HMRC server, that will leave HMRC with a whole lot more information, and the hon. Member for East Antrim (Sammy Wilson) quite reasonably asked what HMRC will do with that information. He has been around for even longer than I have—he is pulling a face, but I do not mean his age; as an hon. Member of this institution, he has been here longer than I have. So, as he knows, the likelihood is that with any splurge of data from businesses hitting the send button, because they have it in the format provided in the software or whatever, a lot of the information will never be looked at. Businesses will supply all that information, but it will not be looked at; it will only clog up HMRC and potentially the system. That might lead to a lower rate of compliance, and none of us wants that.

Furthermore, experience tells us that if people are submitting information four times a year, the likelihood—not the certainty—of errors creeping in goes up about fourfold. Again, that is not necessarily the case, because the system might be a simple one, understood by businesspeople who are simply running a business and not having to be an accountant on the side, so they might be clearer about what they are supplying and therefore less likely to make errors. To expect that, however, would again be a triumph of hope over experience. The greater likelihood is that, with quarterly updates, there will be a considerable increase in errors—if not fourfold, threefold.

--- Later in debate ---

[Mr Gauke]

That is a fair question. The hon. Gentleman raised that point in his remarks and there is a distinction between the nature of the information provided. Whereas a full return can be complex, the update will be based on business records that are already being recorded. There will be one process for both business and tax purposes, which will involve a summary of income and expenses.

The hon. Gentleman asks what is the use of the data and how will they be helpful. First, keeping records digitally will reduce error, partly because that will be done on a more timely basis. Secondly, the data will allow HMRC to focus its attention on the small minority of small businesses that are evading their taxes, and not on those who are trying to get it right. One must also bear it in mind that the software will help taxpayers identify any errors in the information they provide. One of the key benefits permitted by a more digital approach is that errors can be spotted earlier by the taxpayers themselves.

I reassure the House that HMRC does not intend to increase interventions on the basis of quarterly updates. On the contrary: HMRC is seeking to reduce error at source and so reduce the need for interventions. It is the case that by keeping records in real time instead of processing paperwork at the year end, businesses are less likely to lose receipts or make basic accounting errors.

I confirm that the proposal applies to large businesses—it is not exclusively for smaller businesses. On whether the software will work, let me point out that there are already six free products on the market and we expect there to be more as small software firms innovate to meet business needs. Such firms are clearly keen to engage and produce new products and services—we see that in the growth of apps—and already 30,000 small businesses have downloaded free record-keeping apps suited to all varieties of devices, whether tablets or smartphones.

One point that came up repeatedly and which was made by the hon. Member for East Lothian (George Kerevan) was that we are rushing this through. Let me reassure him and others that the Major Projects Authority has examined the plans and that it views them as deliverable. However, neither the Treasury nor HMRC are complacent, and we do understand that there are challenges, and I will pick up on some of them. However, it is worth noting that this is a five-year roll-out. We are engaging in substantial consultation this year. The piloting and testing of the technology and the various processes will then follow.

Phone calls were mentioned on a number of occasions. I said in the main Chamber earlier this afternoon that HMRC’s performance in January, which is traditionally a busy month, because of the self-assessment deadline, has been at a very high level. The last number I saw, which was for last week, suggested that 89% of calls were being answered and that the average waiting time is four minutes, which, it would be fair to say, is better than the historic norm for HMRC.

It is worth pointing out that the overall £1.3 billion package of investment for HMRC will allow more of its customers—not just businesses, but individuals—to go online, thus reducing calls. In addition, HMRC gets many calls about information that will in future appear in taxpayers’ digital accounts. For example, people call to find out their reference number or to chase a refund, and digital accounts will take out a large number of those calls. As I said, call centre performance is now also much improved.

My hon. Friend the Member for South Ribble (Seema Kennedy) raised the issue of sanctions. We will consult on the sanctions that will be appropriate in a digital environment. Penalties and other sanctions will not be the same as those that apply now to end-of-year returns. We will want the new process to bed in before we turn on any sanctions. There is no plan to penalise those who try to comply. I point hon. Members to HMRC’s record on the introduction of real-time information. There was a careful and measured approach to penalising people, and only deliberate non-compliance resulted in sanctions while the system was being introduced.

A couple of hon. Members asked whether quarterly updates will be required to take account of accounting adjustments for stock and work in progress, which are currently made only once a year. Detailed issues such as the allocation of capital allowances and the counting of stock levels will be addressed through consultation. I stress that all allowances, deductions and reliefs that are currently annual will remain so. Of course, for the many businesses that use cash accounting, that is much less of an issue, but I recognise that it is an issue for some businesses. Again, for issues such as work in progress, we are not requiring information quarterly.

Concerns were raised about payment. No decision has yet been made about changing payment dates. In December, alongside the “Making tax digital” road map, we published a discussion paper on options to simplify the payment of taxes. An initial consultation will take place shortly, with a further, full consultation to take place later this year.

My hon. Friend the Member for Morecambe and Lunesdale (David Morris), who does so much for the self-employed in the role he plays for the Government, raised the issue of payments following quarterly updates. Again, I stress that no decision has yet been made about changing payment dates.

Questions about how the changes will affect seasonal businesses will be addressed through this year’s consultation. Businesses trading seasonally may be due a tax refund in-year. If they update HMRC more frequently than they do now, that will allow HMRC to assess them for such a refund, so there may be a financial benefit for them. Let me also stress that the quarterly update will be based on actual information, not forecasts. I hope that that provides some reassurance.

In terms of implementation, I reassure hon. Members that we will carry out extensive testing. Roll-out to businesses will take place when the process and the design are known to work.

I touched on cash accounting earlier. About 2 million businesses operate on a cash basis and do not need to account for work in progress, stock and so on. For others, updates will provide an increasingly accurate picture through the year. However, direct taxes will remain annual taxes, so some adjustments will need to be made at the end of the year. That should, however, be less of a task than the traditional annual tax return, because much of the information will already have been pulled together.

[Chris Leslie]

I am trying to envisage what the Minister is discussing, because there is still quite a lot here that is open to consultation. Data on income and expenses would be supplied through these quarterly updates, but we might not necessarily be able to get rid of the annual return, which might still be necessary because of tax reliefs and so forth. [Interruption.] Yes, people could be doing these things five times a year—there would be one big final return and these updates along the way. Are we getting rid of the annual tax return or not?

[Mr Gauke]

The traditional annual tax return, we can get rid of. What I am saying is that, rather than starting largely from scratch and pulling all the information together, businesses that need to make adjustments at the end of the year will have already done much of that work. Now, as I say, the tax system remains an annual system, and one needs to be able to look at the year as a whole for things such as capital allowances. However, it is worth bearing it in mind that the capital expenditure of the vast majority—something like 98%—of businesses would fall within the annual investment allowance of £200,000, so that is not necessarily too much of an issue for them. However, I understand the point about work in progress.

The hon. Gentleman is absolutely right to make the point that there is still quite a lot to consult on. Sometimes, I fear that we are criticised both for rushing things, charging in and not listening and for things being a bit vague because we are still consulting on them, and there is a certain mutually exclusive element to those criticisms. However, the sense of direction is clear, and it is right that we consult on the details.